Wednesday 28 Feb 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on February 27, 2023 - March 5, 2023

The recent rise in global food prices raises food security concerns in Malaysia. Food prices sharply increased by 5.8% in 2022, which was higher than the overall inflation rate of 3.3%. The increase in food prices in Malaysia could be mainly attributed to events starting from the Covid-19 pandemic in 2020, that caused major disruptions in the global agriculture supply chain, to the recent conflict between Russia and Ukraine. The war disrupted the supply of primary inputs in agriculture, including petroleum and fertiliser, sending shocks to global prices of maize, wheat and vegetable oils. Continuous hikes in US interest rates in the past year have also weakened the ringgit, making our food imports more expensive. If these issues persist, they will pose serious threats to food security in Malaysia. How do we ensure that food remains affordable and everyone has access to sufficient, safe and nutritious food to meet their dietary needs and maintain a healthy life, especially the lower-income group?

High food prices affect household purchasing power and reduce the ability to access sufficient and nutritious food. In addition, the increase in food prices contributes to a general increase in the cost of living, putting a strain on household budgets and potentially causing a decrease in consumer spending in other expenditure categories. The impact is more pronounced on lower income households as a larger portion of their income is spent on food compared with those with higher incomes. According to the 2019 household expenditure survey (HES), the B40 group spends 24.2% of their household consumption expenditure on food and non-alcoholic beverages. With rising food prices today, it will not be surprising if the same group spends well over 30% of their income on food.

The food inflation issue is also aggravated by a sluggish economy that was initially triggered by the recent pandemic, resulting in a host of problems, including declining household income. The weakened economy has also led to an increase in unemployment. In the fourth quarter of 2022, the unemployment rate was 3.6%, with a total of 600,500 people classified as unemployed. Of these, 490,500 were young people between 15 and 34 years old. The government has implemented various countermeasures, such as allowing the withdrawal of Employees Provident Fund savings to support income loss. However, repeated withdrawals have depleted the retirement savings funds of many, leaving them with very little buffer for retirement. As of June 30, 2022, of the 12.78 million EPF members who are under 55 years of age, 52% or 6.62 million members have less than RM10,000 in savings. These individuals, upon retirement, will be highly susceptible to food insecurity.

Malaysia produces a wide range of food commodities but we are still import-reliant on food such as rice, meat and dairy products as our domestic production is not sufficient to meet our consumption demand. We also import a lot of commodities that are not produced locally such as wheat, barley, maize and temperate fruit and vegetables. The country has been running a food trade deficit since 1983, and this deficit has been growing over the years. In 2020, our deficit stood at RM31.1 billion, with food imports amounting to RM75.7 billion and exports of RM44.6 billion. The ballooning deficit can be mostly explained by the growth in demand for food due to the increase in population and income. Income increase also changes our preferences and we have seen surges in demand for foreign food products. Malaysia imports food commodities mainly from China, India, Thailand, Australia, Brazil, the European Union, the US, Argentina, New Zealand, Vietnam and Indonesia.

While import dependence exposes the country to global food price and supply volatility, it will still be possible for us to manage these risks. Import dependence also may not necessarily be bad if the country can afford it, and a high self-sufficiency ratio (SSR) may not guarantee that food is widely available and affordable to everyone. Many countries that are known to be net food exporters, such as Argentina, Brazil and Spain, are ranked lower than Malaysia in terms of food security. In a deficit situation, it is important for Malaysia to have diversified sources of food imports rather than relying on only a limited number of countries. This will help lessen the risks of supply shocks and shortages. We can take Singapore as a case in point. The country relies heavily on food imports but it diversifies its risks by sourcing food from 170 countries. It also acquires farms all around the world to guarantee supply.

Improving food security is closely linked to economic growth, and not necessarily through domestic food production alone. To sustain economic growth, it is important for Malaysia to increase productivity, not only in the food and agriculture sector, but in all other sectors of the economy as well. As long as the country experiences a growth in output and maintains a healthy overall trade balance, it should be able to finance its deficit in food trade. Malaysia has been enjoying an overall trade surplus since 1998, and in 2022, our trade balance reported a hefty surplus of RM227 billion. On the other hand, efficiency and productivity would result in growth in national income. And if the wealth is equally distributed, it will guarantee food security. Almost all countries that have high food security are developed countries with high national income and low inequality.

In ensuring food security, it is important for the country to not only intensify farm output but also to develop the whole food and agriculture value chain. The development of downstream sectors, such as food manufacturing and processing, will speed up the transformation of Malaysian agriculture into a high value-added sector. The development of capital-intensive and high-technology downstream sectors will create jobs for high-skilled labour and help to promote wage increases. Advanced downstream sectors will also create technological spillovers to farm production that will eventually increase efficiency and productivity. This whole transformation will not only help to increase output but, more importantly, income, which is a key determinant of food security.

To make sure essential food remains affordable to everyone, it is crucial that the government institute the right measures to achieve this objective. Price control, which is an easy immediate measure to implement, may only be effective in keeping price rises at bay in the short run. Price controls distort the market and may hurt producers as well as consumers in the medium and longer term. For example, price controls for chicken and eggs have resulted in farms cutting down output as they are unable to cover the escalating production costs. This inevitably has led to shortages, both of chicken and eggs. The shortages occurred despite the implementation of a production subsidy to mitigate the cost increase. A better policy consideration to ensure affordability is to provide direct subsidies to the needy. Measures such as cash assistance and food stamps for the poor — rather than the more distortionary price controls — will be a better option in making sure essential food is available and affordable to the group that is most vulnerable.

In the initial Budget 2023 that was tabled last year, the government announced several initiatives to support the agrifood sector and smallholder farmers such as a low interest financing scheme from Bank Negara Malaysia and investment programmes from Agrovest and Khazanah Nasional to fund start-ups and smallholder farmers. The government has also allocated funds for sustainable agrifood projects, enhanced tax incentives and put forward proposals such as an accelerated capital allowance and complete tax exemptions on capital investments to boost agricultural productivity and efficiency. It is crucial to preserve these measures and implement additional initiatives to promote capital investments in the food and agriculture sector, especially for integrating ICT and advanced technology in production and distribution. By leveraging technology, the sector can enhance efficiency and yield, ultimately leading to lower production costs and improved food security for the country.

Shaufique Sidique is a professor of agricultural economics at the School of Business and Economics and director of the Institute of Plantation Studies, Universiti Putra Malaysia. Dr Nur Ameera A Jaz is an independent researcher working on issues related to agriculture and natural resources.

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